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The real estate industry is complicated. You’ll undoubtedly hear lots of unfamiliar terms during the homebuying process. One of them is escrow fees. What does that mean, and how does it affect you? Read on for a full explanation of what escrow fees are, who pays them, and how much they cost.
What Are Escrow Fees?
Once you find the house you want, negotiate with the seller, and get your offer accepted, you’ll move toward closing day. This is when you’ll start hearing about escrow fees, which are part of the closing costs.
Depending on who agrees to pay the closing costs, the buyer and/or seller pays escrow fees to a third party such as a title company, which holds the money in escrow before distributing it to cover various closing costs.
After closing, the mortgage company takes over the job of distributing money from the escrow account to pay for things like homeowner’s insurance and property taxes. The borrower’s monthly mortgage payment will include a portion earmarked to go into the escrow account to cover those fees.
Which Fees Are Considered Escrow Fees?
We mentioned two of the most common fees paid by escrow — insurance and property taxes, but there are other escrow fees. Some of them include:
- Mortgage origination fees.
- Real estate attorney commissions.
- Title insurance premiums.
- Local government fees and expenses.
Who Pays Escrow Fees?
As mentioned above, the escrow fees paid at closing are negotiable between the buyer and seller. Depending on the terms of the contract, they may split the fees evenly, or the buyer or seller may pay all the fees. In a seller’s market, the buyer will often offer to pay all the fees to look more attractive to the seller. In a buyer’s market, the seller may offer to pay the fees to get the buyer to sign the contract.
After closing, the borrower is responsible for covering the escrow fees for ongoing tax and insurance payments.
How Much Are Escrow Fees?
Buyers can usually assume escrow fees are going to cost between 1% and 2% of the home’s selling price. If your house costs $300,000, for example, you can expect to pay between $3,000 and $6,000 in escrow fees.
Some borrowers are surprised that escrow fees can vary by so much. Factors that affect your escrow costs are:
- Where you live. Some areas of the country have higher escrow costs than others.
- Property taxes. If your new home is located within the city limits, you’ll pay city and county taxes. These fees will make your escrow costs higher than if your home were located in the county.
- Insurance premiums. More modest homes and properties in low-risk neighborhoods will have lower insurance premiums than properties in hurricane-prone areas or flood zones. These differences can have a significant impact on your escrow fees.
Can You Calculate Escrow Costs Before Closing
Don’t worry, you won’t go into closing with no idea of how much your escrow fees are going to be. Take advantage of several online calculators that are helpful in estimating your escrow costs. Your lender will also be able to offer you an estimate of the fees you’ll be responsible for paying.
When Are Escrow Fees Paid?
Escrow fees will be an ongoing expense for new homeowners. The first escrow fees will be paid at closing as a portion of the closing costs associated with buying a home. From there, the escrow costs will be rolled into your monthly mortgage payment.
Your total escrow fees will be divided by 12 months and that amount will be added to your payment. Escrow amounts can change every year because of tax hikes or insurance premium increases. When this happens, you’ll see an increase in your mortgage payment — even if you have a fixed interest rate.
Like many things involved in the homebuying journey, escrow fees may not be something you’re familiar with. However, you can easily understand what they are, how much they cost, and who will be paying them. As always, if you have questions, your loan officer can answer them for you.
